CoPS/IMPACT Working Paper Number G-159

Abstract

This paper uses a large-scale computable general equilibrium model of Bangladesh to
simulate the economic effects of attracting foreign investment by improved business
confidence. The simulation results indicate that if all revenue of newly arrived capital
accrues to foreign investors and the government maintains budget neutrality, in the
long-run this would expand GDP slightly. In general, capital-intensive sectors experience
robust expansion and labour-intensive sectors suffer a contraction in output and
employment. Urban households experience increases in consumption because they are
relatively heavily concentrated in manufacturing sectors that are favourably affected. In
contrast, rural households experience decreases in consumption because they are
relatively concentrated in the agriculture sector which is adversely affected.